RESIDENTIAL PROPERTY FLIPPING RULE – BUDGET 2022

Where property is acquired for the purpose of resale at a profit, any gains (or losses) on disposition are on income, rather than capital account.

Determining the intention of the taxpayer requires a detailed review of all relevant facts and is a matter frequently disputed in the courts. Often, the taxpayer also argues that a capital gain on disposition of the property attracts no tax due to the principal residence exemption.

Budget 2022 proposed a new rule that would deem all gains arising from the disposition of residential property (including rental property) that was owned for less than 12 months to be business income, subject to specific exceptions.

The measure would apply in respect of residential properties sold on or after January 1, 2023. Although Budget 2022 included substantial discussion of this proposal, draft legislation was not included. The

government indicated that there will be a consultation once the draft legislation is released.

The deeming rule would not apply where the property is disposed of as a result of one of the following life events:

death – due to, or in anticipation of, the death of the taxpayer or a related person;

household addition – due to, or in anticipation of, a related person joining the taxpayer’s household or the taxpayer joining a related person’s household (e.g. birth of a child, adoption, care of an elderly parent);

separation – due to the breakdown of a marriage or common-law partnership;

personal safety – due to a threat to the personal safety of the taxpayer or a related person, such as the threat of domestic violence;

disability or illness – due to a taxpayer or a related person suffering from a serious disability or illness;

employment change – for the taxpayer or their spouse or common-law partner to work at a new location or due to an involuntary termination of employment. In the case of work at a new location, the taxpayer’s new

home must be at least 40 km closer to the new work location;

insolvency – due to insolvency or to avoid insolvency; and

involuntary disposition – a disposition against someone’s will, for example, due to expropriation or the destruction or condemnation of the taxpayer’s residence due to a natural or man-made disaster.

Properties held for more than 12 months, or meeting one of the exceptions noted above, would continue to generate either business income or a capital gain on the disposition, depending on whether the property was acquired for the purpose of resale at a profit (business income) or was acquired for some other purpose (capital gain).

While this measure was reflected as a “personal income tax measure” in the Budget documents, it was unclear whether the deeming rule would also apply to corporations and other taxpayers.

Assignment sales

The government announced in November 2022 that it would expand the new residential property flipping rule to cover profits from assignment sales, applicable to transactions occurring on or after January 1, 2023.

Under this proposal, if you dispose of a right to purchase residential property and the right was held for less than 365 days before disposition, the profit would be treated as business income and would not be eligible for capital gains treatment, subject to the exceptions for certain life events or circumstances described above.

If you hold a right to purchase a residential property under a purchase and sale agreement and proceed with the purchase, the 12-month holding period resets on the date of the property purchase. The property flipping rule may then apply if you dispose of the residential property itself within 12 months of its acquisition.

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